What is Financial Hardship for Student Loans?

Student loans are only automatically discharged when you file bankruptcy in Canada if you have ceased to be a student for more than seven years at the time you file. However, there are cases in which clients cannot afford to wait for the seven year mark to discharge their student debts automatically. Financial hardship for student loans is an application you can make to bankruptcy court to have your student loans discharged five years after you cease to be a student. If the court agrees, it is possible to go bankrupt and have your student loans discharged after as little as five years instead of seven. It’s important to note that the time frame is not based on when you got the loan, but when you stopped being a student.

On today’s podcast, we dive deeper into what financial hardship for student loans is and how it works with Richard Howell, a bankruptcy lawyer with Clark Farb Fiksel in Toronto.

The bankrupt has and will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the student loan.

In simple terms, these requirements mean that you have “tried your best” to make payments on the loan, but due to your circumstances you have been unable to do so, and as a result would suffer continued hardship if your student loan is not eliminated.

A Licensed Insolvency Trustee alone cannot make this judgement. You must make an application to court.

What Would be Considered Financial Hardship?

If your income is well above average, it will be very difficult to prove hardship.

However, if you are a single parent, with children, living on a moderate income, and also carry a $20,000 student loan, and you’ve been out of school for over five years, you may be a candidate for hardship relief.

Another common example would be someone who has an education in an area where they have been unable to find a job, so they have no ability to repay the loan.

If you were unable to complete your education through no fault of your own, you may be eligible for relief. For example, if the private vocational institution you attended went out of business before you could graduate (and it has happened), you can’t get a job in your field because you couldn’t graduate, so you may be a candidate for relief.

What’s the Process to Apply to Court for Hardship Relief?

The first step is to talk to your trustee. They can help you confirm that you meet the basic requirements (including the five year rule). They can then advise you on how to proceed.

It is possible to make an application to court yourself, but your chances of success are generally increased if you are represented by an experienced lawyer. However, lawyers charge fees, and depending on the complexity of your case lawyers costs could be in the same range as what you paid in your bankruptcy (although most will accept payments over time), so the cost is a consideration.

FULL TRANSCRIPT SHOW 210 – What is Financial Hardship for Student Loans?

Doug Hoyes: It’s the month of September, students are back in school and at this time of the year our thoughts turn to student loans. It’s a sad reality in Canada that a significant number of students are only able to pay for postsecondary education with the help of student loans. And if you graduate and immediately get a high paying job, you can pay back your student loan and all is good. But what happens if you can’t find a job that pays you enough to pay your living expenses and pay back your student loan, then what?

Unlike with most other debts you can’t simply go bankrupt to eliminate your student loans because we have a rule in Canada that says that government guaranteed student loans are only automatically discharged in a bankruptcy or consumer proposal if you have ceased to be a student for over seven years at the time you file your bankruptcy or consumer proposal.

To clarify, it’s not seven years from when you got the loan; it’s seven years from when you cease to be a student. So that’s seven years from when you graduated or seven years from when you left school. Let me emphasis another point. When I refer to student loans not being dischargeable in bankruptcy, I’m referring to government guaranteed student loans, which would include loans made under the Canada Student Loans Act or provincial programs like OSAP.

My guest on today’s show will make a comment on this a bit later. There are big banks that offer student lines of credit, often for professionals like doctors. That’s not what we’re talking about here. Those bank loans are not government guaranteed loans so they are not considered student loans in a bankruptcy so they are eligible to be discharged just like any other unsecured debt.

So what can you do if you’ve been out of school for less than seven years and you have student loans that you are having trouble paying? The first step is to do your research and see if there are any deferral or interest forgiveness programs that you may be eligible for. Obviously, if you have the ability to repay your loans that’s what you should do. Another option if you have a lot of other debts is to file a bankruptcy or consumer proposal to deal with your other debts, which may free up enough cash to allow you to service your un-dischargeable student loans.

There is one other option and it’s a very special case. Section 178 Sub 1 Sub 1.1 of the bankruptcy and insolvency act contains what we licensed insolvency trustees refer to as the hardship provision. And it says that if you go bankrupt and have a student loan and you have ceased to be a student for five years or more, you can apply to bankruptcy court to have your student loan discharged. There are two conditions, the bankrupt has acted in good faith and the bankrupt will continue to experience financial difficulty to such an extent that the bankrupt will be unable to pay the student loan. What does acted in good faith mean? That’s a tricky question. A common interpretation is that you have tried to make payments on the loan but if you have financial hardship that may not be possible.

So what is hardship and what is good faith? Those are the first two questions I asked Richard Howell, a bankruptcy lawyer with Clark Farb Fiksel in Toronto. He was a previous guest on this podcast where he talked about bankruptcy court where he has many years of experience. So here is an example he gave of a typical student loan hardship situation.

Richard Howell: Typically it may be a single mother for example that has no possibility of ever paying the loan and just will never have sufficient income to even make a dent. One of the factors in the act is whether they’ve made any payments on the loan, which seems to be I don’t know if a bit silly is too strong but if they could make payments on the loan they wouldn’t be court on a hardship application.

Doug Hoyes: Yeah that’s kind of a –

Richard Howell: Oxymoron.

Doug Hoyes: Yeah it doesn’t really make sense. So, okay so let’s say then I went bankrupt and at the time I went bankrupt my student loan was five years old. Obviously if it was more than seven years old I don’t need to go to court because it’s going to be automatically discharged so there’s this two year window between five years and seven years when this hardship rule kicks in. And I know when someone comes in to meet with me I say to them well, if we’re at year number six now you go bankrupt today your loan, student loan, isn’t automatically discharged why not just wait another year to get past the seven year mark? But in a lot of cases no, I’ve got a bunch of other debts, my wages are about to be garnisheed, I have to do this now.

So we go ahead and file the bankruptcy and then okay, you know what, student loans were a big number, I would like to go to court and see if I can get the student loan either reduced or eliminated. So, what would be the process? I guess the starting point would be well, let’s talk to a lawyer who knows how to do this. If someone comes in to see you, to talk about whether or not they should make a hardship application how would the discussion go, what kind of questions would you be asking, what would you want to know?

Richard Howell: Well, typically when the phone if they’re going to come in to see me I’ll ask a couple of qualifying questions so we won’t waste everybody’s time. How much are you making? If you’re making 50 or 60,000 a year don’t bother coming because you’re not going to get the relief. Except, well I guess there’s an exception to everything but it’s going to be highly, highly unlikely. The people that typically come in may have got a degree in computer programming’s a good example and they’ve been working for the last 12 years as a pizza delivery man because there’s no jobs. They’ve got a couple of kids and a wife and they can’t make ends meet. They’re a good candidate. Or as a single mother with a couple of kids and making minimum wage, they’re a good candidate.

Doug Hoyes: So the qualifying questions, the first one would be how much are you making, what kind of income are you earning? What would be the second qualifying question you’d be asking?

Richard Howell: Well just the timing on the loans, do you fit into the five-year period?

Doug Hoyes: Just to make sure that it qualifies. So if I phone you up and say hi, Richard, I’m a doctor. I make $200,000 a year, I’ve got $300,000 worth of student loans because of all the degrees and everything I’ve got and it’s a lot of money and I can’t pay it you’re going to say to me, in terms of a hardship application I don’t have much chance, is that correct?

Richard Howell: Yeah, although apropos, the doctors normally have a loan from a particular bank, which will remain nameless, that is effectively a student loan. It’s typically 100 or $150,000. The bank in question attempted to characterize the loan as a student loan and try and prevent the bankruptcy applying. The court said nothing doing, that was a credit decision for the bank, it’s not the public’s money, get out of here bank.

Doug Hoyes: And we won’t say what the name of the bank is but you can email me and I’ll tell you what their three initials are if you want to know more. And so yes, you’re making a key point and that is we’re talking about government guaranteed student loans. So if you go to the bank and get a student line of credit, which is what this particular one is called, then no, that doesn’t go under these rules, that’s just like getting a Visa card. It’s a loan that the bank granted to you on the basis that they figure well, once you’re a doctor you’ll be able to pay it back so the bank then could not go back to court and say oh, yeah this falls under the same student loan rules. So, that’s again why you’re asking these two qualifying questions then.

Richard Howell: Exactly but let’s be careful not to mix a student line of credit guaranteed by her majesty with the bank’s student line of credit that’s not guaranteed.

Doug Hoyes: Got you. So, I mean I gave the example of OSAP earlier obviously that is a loan directly from a government agency, it is also possible to have a student loan from a regular bank but if it’s guaranteed by the government then it would fall under the rules we’re talking about.

Richard Howell: Exactly.

Doug Hoyes: That’s the key point then. So okay, the bankrupt phones you up and you have a discussion on the phone and they say I have an education but I have not been able to get a job in my field maybe, you know, I’m a computer programmer but I know a bunch of languages they don’t use anymore because now everything’s all apps on a phone and that’s not my area of expertise so I have not been able to earn considerable income as a result of my education. I’ve got, you know, a family, I’ve got expenses, I’m a single parent, something like that. And so you say OK you’re probably someone that would qualify for this process.

So then the next step I assume I come in and meet with you in person and obviously, you know, you’re a lawyer you don’t do this for free, there’s a fee to be charged. And if someone wants to know what that fee is give you a call because every situation is going to be different I assume. Some cases are simple, some cases are more complex. So they come in to see you, what types of things are you going to want to know, what happens next?

Richard Howell: Well, I’m going to want whatever bankruptcy documents they’ve got. I’m likely going to have to go to the bankruptcy office and have the file brought in from Cooksville where they store them so that I can see everything in the file. The court’s going to want everything in the file when we go in any event. I’m going to want to see their tax information of the last few years, returns, notices of assessment. And I’m going to want a statement of income and expense on a monthly basis showing where the shortfall is and that they are actually suffering hardship.

Doug Hoyes: And then from there you prepare a bunch of paperwork I guess.

Richard Howell: Yeah it’s a reasonably simple affidavit. It covers the basis and then we put the affidavit in with what’s called a motion record, we serve the trustee and any opposing creditors and oh, of course her majesty probably in both capacities if they’ve got a federal loan and a provincial loan, finding where you serve her majesty’s always a little bit of a challenge. We think we’ve got it nailed at the moment but times change.

Doug Hoyes: I know, it’s always difficult for us too as to who’s got carriage of this? Because obviously the loan happened many years ago and so it may be a different address, different department whatever. So you prepare all this paperwork, send it out to the student loans people, the trustee, any other creditors that may be interested in the matter and then it’s going to take a period of time before the actual court appearance happens, right?

Richard Howell: Well, you have to serve with 10 days notice. From the time you mail it, it has to be at least 10 days prior to court. The practicalities are the Ontario Student Loans are last time I did one of these are situated in Thunder Bay. And typically they get the mail, they look at it at some stage of the game, probably late. And the day before the hearing you get a call from the student loan lawyers in Toronto who say we need an adjournment. So of course you give it to them so you get kicked another couple of weeks. But it does mean two attendances at court and a little more messing around.

Doug Hoyes: Yeah and with Toronto court it’s not like fast food place where you can just go in and get an appointment, things are scheduled in advance, it takes time to get there, right?

Richard Howell: Well it’s reasonable. We can get a motion date for example, maybe three to four weeks out is –

Doug Hoyes: And obviously it would depend on the time of the year. Over the Christmas break it’ll take a little longer, and over the summer perhaps if there’s vacations and whatnot. But generally it can be done reasonably quickly is what you’re saying. So, then on the appointed day you go to court, you would have the bankrupt with you I assume?

Richard Howell: Not as a rule. It’s – I sort of like to have them around in case there’s questions but it’s not strictly necessary.

Doug Hoyes: Okay. And so, I mean I guess if it was me and this was a big deal I would want to be there too just in case the judge wants to why aren’t you working or whatever? Obviously you’ve got this all in your motion material and your affidavit and everything but I guess as a backstop it’s nice to have them there. And so you then at the appointed time appear in court, you present your arguments, obviously a lot of it is in writing already.

And what is the typical response of the student loans people? Because obviously they’re the only ones who are going to object to this, no one else really is interested. I mean as a trustee on the case I don’t really have an opinion one way or another. I would obviously like the bankruptcy to get a break and everything but the court doesn’t really care what I think in this particular case, it’s not really up to me. What typically are the student loans people doing? In other words are they very often showing up in court and banging on the table and trying to argue the motion or is it more likely that they’ll say yeah, we understand this probably is a hardship case and they don’t argue it?

Richard Howell: I think it’s fair to say they’re typically atypical.

Doug Hoyes: Okay, so there is no rhyme or – there is no obvious thing that’s going to happen.

Richard Howell: No, the spectrum is if it’s meritorious, righteous application they’ll look at it and say yeah, this person can’t pay, we’re not fighting this. They’ll send you a letter saying her majesty does not oppose.

Doug Hoyes: In which case you go to court and you stand up and say I’ve got a letter saying her majesty doesn’t oppose and it’s pretty much a done deal at that point I would think.

Richard Howell: Yes, expect her majesty can be of two minds of course. Her majesty in Ontario can have a different opinion than her majesty Ottawa.

Doug Hoyes: Got you. So the feds may object, the provincial may not in which case then the court has a decision to make.

Richard Howell: Yeah, pretty much or you end up with the council in court for the objector and you make a deal before court.

Doug Hoyes: So explain to me making a deal before court then. So the court hearing is I don’t know it’s at 10:00 in the morning, it’s at 2:00 in the afternoon, whatever it is. And you all know who’s on the docket beforehand and so is it the kind of thing literally on the courthouse steps. You pull a person aside and say look, here’s what I’m going for, what do you think? Is that how it is or is done on the phone in advance, what typically would happen?

Richard Howell: Well, it depends I know the council for the – well, I know the council for the province who’s normally the same one. And I can phone her ahead of time, not too far ahead of time because they just delivered the file to her 15 minutes before the hearing. But subject to that we can usually kind of come to an agreement beforehand. With the feds if they’re coming down the lawyer from justice gets the file, well if it’s a 10:00 hearing normally it’s 9:30 for the first time to look at it. That’s a bit cynical but also true.

Doug Hoyes: Well, I’ve certainly been in court where in exactly the situation you’re describing and the judge, the register, the master, says to the opposing creditor’s lawyer okay what do you want to do? Last week we had a case, it was very similar to this and there was a lot more money and no one was here and they say well, I don’t know, I don’t assign the cases to myself I just got the file, you say, yesterday or 15 minutes ago. So, in that scenario then you’re going to try to get them on the phone in advance. But if that’s not possible then like literally just before the hearing then you kind of pull them aside and see what can be done?

Richard Howell: Yeah, you make your deal if you can and if not tough it out. I haven’t toughed out many. One of the ones I remember is it was before a registrar [Nette] as he then was. And my guy was saying that oh, he couldn’t get a job and yadda, yadda and that he was driving a taxi and the registrar said let me see the driver’s licence. And so he handed him up the driver’s licences and the registrar Nette knew such things and he said to me yeah, your client has a commercial long distance trucker licence here, get out of here effectively.

Doug Hoyes: Yeah, so he can get a job making good money so that’s what he should do.

Richard Howell: Precisely.

Doug Hoyes: So is it fair to say that in most cases that you’ve been involved with because you’ve in effect, you know, I don’t want to use the word pre-screen, but you’ve asked questions beforehand and so you know the chances of success are reasonably good before you take on the case that in most cases the court in your experiences amenable to this type of hardship application?

Richard Howell: Yes, although technically the court has to either wipe the loan out or not, they can’t make a deal and say pay half or pay some percentage of the loan.

Doug Hoyes: So it’s almost like arbitration in baseball, well I say this, you say that and they’ve got to pick one.

Richard Howell: Yes. But that being said there have been occasions on which something’s been worked out and I’m not going to give you the particulars.

Doug Hoyes: And I think the kind of message there is ultimately the court can do what the court wants to do. I mean that’s why there’s a court.

Richard Howell: Well, no it’s normally done at the let’s make a deal level.

Doug Hoyes: I see and the court either doesn’t object to it or blesses it or whatever.

Richard Howell: If council are happy.

Doug Hoyes: The court is happy.

Richard Howell: Yeah.

Doug Hoyes: So I guess the message there then is that if you are, you know, going to have a lawyer going to court for a hardship application it’s good to have someone with some experience and the ideal scenario is work something out in advance with the opposing creditor if there is one so that you can go to court and get the deal done. That’s generally the better option.

Richard Howell: Exactly. And just an aside as far as lawyers and costs are concerned my old mentor once said if you want nice fresh oats you have to pay the price. If you’re satisfied with oats that have already been through the horse it’s a lot cheaper.

Doug Hoyes: It’s a lot cheaper. So, yeah and I guess this is kind of the trick in a hardship application, that the whole point of going to court because I can’t pay my student loan is because I don’t have the income to do it. And so, you know, do I have the money to hire a lawyer to go and do this? I assume in most cases, I mean obviously you’re going to get something upfront if you’re going to be showing up court and everything. But is it fairly typically that you’re going to put the debtor on some kind of payment plan if they can’t pay for it all upfront?

Richard Howell: Yeah, it comes with the territory, something’s got to be worked out. It depends on what the clients got. Normally something can be worked out.

Doug Hoyes: Got you. So that’s obviously the answer then, sit down with the lawyer upfront, find out what kind of makes sense and go from there. Excellent, well I think that’s a good way to end it. So in simple terms this is a provision of the act that’s there but as you’ve said it’s not a very common thing, I mean it only applies to people who have a student loan, they’ve gone bankrupt and it’s between five and seven years on the clock, which is obviously a limited number of people, most people are going to wait till after the seven years. I mean if you can get through five years you can get through seven. But for a certain number of people this is a viable option.

Richard Howell: Yeah, for the other people that can’t pay the loan [no hope] they’re not going to get the hardship relief. The only other possibility is a second bankruptcy or consumer proposal. It seems kind of sad that the student loan comes to that at the end of the road.

Doug Hoyes: So you would complete your first bankruptcy, which maybe is completed in year five or six after you’ve left school. And then it might be that after year seven then at that point maybe the only debt you’ve still got is the student loans and at that point then it’s either a bankruptcy or a consumer proposal to deal with it.

Richard Howell: Yes and if there is a possibility depending on the amount of the loan that students loans will come in and ask that there be a condition of your discharge, that you pay a chunk of the loan, it’s remote. But I haven’t actually seen it done to defeat a student loan.

Doug Hoyes: But it could happen. I guess that’s kind of the message in a bankruptcy, that any creditor has the ability to object to your bankruptcy ending. That’s just how the process works.

Richard Howell: Yeah, exactly.

Doug Hoyes: Excellent. Well, I think that’s a good way to end it thank you very much Richard. That was our discussion about student loan hardship applications, thanks very much.

Richard Howell: My pleasure.

Doug Hoyes: That was my conversation with Richard Howell about student loans and the hardship provisions. And I agree with is comment that this situation is kind of sad. When I went to university, over 30 years ago, it was possible to get a summer job where you could earn enough to cover your tuition and books. If your parents helped out with living costs or you got a part-time job while you were in school, you could easily graduate with no student loans.

Today it is virtually impossible to find a summer job that pays enough to cover your education costs. So if you don’t get help from parents or scholarships and grants you have no choice but to get a student loan. If you can’t find a good job when you leave school, student loans become a big financial burden. I know that over 15% of people who file a bankruptcy or consumer proposal with my firm, Hoyes Michalos, owe money on student loans at the time they file. And they owe around $14,000 on student loans when they file. That’s a big number. I’ve advocated for more fair student loan rules for many years and I’ll keep doing so. But for now, if you have student loans you can’t pay, you do have options.

As I said at the start of the podcast if you have a lot of other debts it may make sense to file a consumer proposal or bankruptcy to deal with those debts. So even if your student loan is too new to be dischargeable, dealing with the other debts may free up enough cash to allow you to service the student loan.

As Richard Howell said on the podcasts, if you have no choice but to file now it is possible to file again after you reach the seven year mark. And, as we discussed today, a hardship application may be an option after five years. What’s the best option? Every case is different. So your best option is to talk to a licensed insolvency trustee. The only debt professionals licensed by the federal government and by law there are no upfront fees.

That’s our show for today. Full details on student loans and the student loan hardship rules and a full transcript of today’s show can be found at hoyes.com. Until next week, I’m Doug Hoyes, thanks for listening. That was Debt Free in 30.